Cash-strapped charities target middle class with 'planned giving' effort


January 02, 1995|By JANE BRYANT QUINN

NEW YORK -- Charitable organizations in America are struggling to keep up. For four years in a row, individual giving has fallen behind what the charities calculate as their industry's inflation rate. So they're looking for longer-term sources of income to back up their annual fund-raising drives.

Their direction is "planned giving" -- a tax-saving tactic originally designed for the rich but now being refocused on the middle class. Through planned giving, the charities hope to get a slice of the estimated $8 trillion that retirees will soon pass along to their boomer-generation children. They also hope to interest middle-aged boomers in using charitable annuities, as a way of enhancing their own retirement incomes.

Charitable annuities work like this: (1) You give the charity some of your cash savings, or stocks or land that have run up in value. (2) You win substantial current tax breaks. (3) The charity invests your money for growth. (4) Now, or in the future, the charity starts paying you (and your spouse or another person) a lifetime income. (5) When the last beneficiary dies, the charity gets the remaining money.

These aren't pure investments. You have to want to make a charitable gift. But the gift can improve your retirement income while delivering considerable tax savings:

* You avoid the capital gains tax on appreciated property. Say, for example, that you've held a stock or a piece of land for many years and now show a huge profit. You would like more income from this investment. But if you sell, you owe 28 percent of the profit in capital gains taxes, so there's much less money to reinvest. If, by contrast, you give the asset to a charitable trust and the trust sells, it generally pays no tax. It can reinvest all the money, thereby earning a higher income which you can receive for life.

* You create an immediate tax write-off. The size of this deduction depends, among other things, on the amount of your gift, your age and how much income you want to receive.

* You lower your estate taxes. A charitable gift reduces the size of your estate, saving taxes if your net worth exceeds $600,000.

Big estates require expensive legal services. But for gifts on a more modest scale, the charity can do most of the work and usually absorbs the expense, says tax lawyer Philip Temple of Prerau & Teitell in White Plains, N.Y.

A popular planned gift for the middle-aged is a donation to a charity's pooled-income fund. This fund resembles a mutual fund invested for conservative growth. Starting in any year, you can receive a share of the fund's earnings -- so your income fluctuates but could rise. Minimum investment: usually around $5,000 to $10,000.

Older retirees might prefer a gift annuity. This pays a fixed annual income, guaranteed for life and partly tax-free. The size of your payout depends on your age. At 70, for example, you'd get 6.9 percent of the money you put up. Younger people might choose a deferred gift annuity, which grows in value for several years before payouts start. Typical minimum donation: also $5,000 to $10,000.

Some charities (not all) will consider reverse annuities. You give the charity your house or farm, retain the right to live there and can get a lifetime income, too.

If you have a large sum to give away -- say, stocks worth $50,000 or more -- you might consider a charitable remainder unitrust. You receive a varying income from the trust, the amount depending on how fast the investment grows. Annual payout rates are based on the trust's entire market value, running from 5 percent (the legal minimum) to about 8 percent. Savvy investors choose 5 percent. Not only does it give you the largest tax write-off, it also delivers a higher income over time because more money stays in the trust to grow.

A type of unitrust known as a "spigot" trust, usually invested in tax-deferred annuities, lets you turn your income on and off. With a spigot, you might forgo payouts in the early years while the trust's investments build. Later on, you can withdraw extra money to make up for the years you missed. You can only take trust income (traditionally interest and dividends). But in most states "income" can be defined to include the trust's capital gains -- giving you a larger payout.

Spigots can fund a wedding, pay you a retirement income, pay future income to a child. Right now, they're rare birds, but as they become better known they may be the gift-planning device of choice.

Jane Bryant Quinn is a syndicated columnist. Write to her at: Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y., 10022.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.